Financials - All posts tagged Financials

As people take to the street to protest corruption in Brazil, and the economy sours, auto insurance does sound like a good idea.

And the auto insurance business is likely to have low correlation to weak economic growth given low product penetration, according to a UBS upgrade of Porto Seguro (PSSA3.Brazil) to Buy, and boosted per-share earnings estimates by 7% in 2015 and 9% in 2016. Porto Seguro shares are up 2.7% in local trading, while the iShares MSCI Brazil Capped ETF (EWZ) is up more than 4% today.

European Pressphoto Agency

Thousands of anti-government protesters took to the streets in Brasilia, above, and other Brazilian cities on March 15.

Despite new lows in the Brazilian real this week, and the massive corruption investigation at state-controlled Petroleo Brasileiro (PBR) theatening the power and solvency of President Dilma Rousseff’s government, Brazil’s market has rebounded. The exchange-traded fund is up 7.3% for the week.

As for auto insurance, Porto has significant exposure to the segment and, writes Analayst Mariana Taddeo:

“high inflation and rising unemployment could weigh on disposable income and limit insurance growth … [but] macro uncertainties and currency weakness will likely minimise irrational pricing behaviour, while higher rates should further boost interest income and earnings.”

In a survey of 1,200 Brazilians on auto insurance decisions, UBS found:

1) The high renewal rate underpins auto insurance resilience;
2) incremental auto insurance growth potential is low in the short term;
3) but more positive in the medium term, with potential for increasing penetration in the C-class and the Midwest and North regions;
4) service (not price) is the key driver of auto insurance;
5) independent brokers remain the main distribution channel;
6) Bradesco is the most efficient bancassurance player for auto insurance; and
7) affordability is still a barrier to auto insurance growth.

In the report, UBS maintained its Buy rating on BB Seguridade Participacoes (BBSEY and BBSE3.Brazil), which has less auto insurance exposure. UBS maintained its Neutral rating on Sul America (SULA11.Brazil) but raised earnings estimates for the company. BB Seguridade shares are up 2.9% in U.S. trading, while Sul shares are up more than 4.6% in local trading. Banking giant Itau Unibanco (ITUB) is up 3.5% today.

Russia’s central bank lowered its main interest rate Friday by one point to 14%.

Rates have been volatile: in December, rates spiked with an emergency increase to 17% as the the ruble’s value crumbled and the economy headed into recession. The central bank cut rates two points in January. And the spike in inflation last month is putting more pressure on central bank Governor Elvira Nabiullina to cut rates.

” … meetings supported our view that Russia is sliding into deep recession, underpinned by both structural and cyclical factors, increasing the probability of a prolonged slowdown. Under pressure from the government and the banking sector, the CBR has clearly become more growth-oriented, rather than purely inflation targeting. RUB has broadly stabilized on the back of interest rate hikes and some rebound in oil prices; a repeat of the mid-December crisis does not look likely at this stage. We expect the budget deficit to rise significantly this year due to a sharp fall in revenues, but overall the government still supports a conservative fiscal stance. Corporates and banks appear to have enough FX liquidity and revenues to meet their external debt maturities, at least for this year …”

The Market Vectors Russia ETF (RSX) has tumbled 2% today, but has staged a bit of a rally in recent weeks. The ETF is up 10.5% year to date, putting its 12-month decline at 23%. The leveraged Direxion Daily Russia Bull 3x Shares ETF (RUSL) is down 6%. The Direxion Daily Russia Bear 3x Shares ETF (RUSS) is up 6%.

Among financials, Russian bank Sberbank (SBRCY) is down 5.2%; it is up 23% year to date. Russian payment -services provider QIWI (QIWI) is down nearly 6%; it reported better-than-expected fourth quarter revenue growth on Thursday, but failed to declare a dividend “in light of the current geopolitical concerns around Russia and its negative impact on the economy and liquidity management,” Dow Jones Newswires reports.

Russia is in turmoil and so are its banks, but Citi Research still likes Sberbank and Bank of St. Petersburg.

The backdrop is weak macroeconomic growth and a low oil price. Russia expects an average oil price of about $63 per barrel this year and a decline in Russia’s GDP of between 1% and 3%.

Bloomberg News

A monthly market in Sovetov, Keremovo region, Russia.

But Citi reiterated its buy rating on Sberbank (SBRCY), which trades at a discount to its key competitor Bank VTB (VTBR.London) using price-to-book valuation, according to a Wednesday note. Citi analysts Maria Semikhatova and Simon Nellis think the U.S.-traded shares of Sberbank have 20% upside to $4.67, a reduced price target from $5.56.

Sberbank shares are down 64% to $3.90 over 12 months, while the Market Vectors Russia ETF (RSX) is down 41% over 12 months. Citi expects pressure on Sberbank’s net interest margins, with the figure contracting to 4.5% in 2015 and recovering to 5% in 2017. But, they write:

“Sberbank appears well-positioned to weather the economic downturn, given its competitive advantage in the retail deposit market and superior asset quality. VTB is most vulnerable to higher funding costs and increasing credit risk in Ukraine and Russia, and requires capital support from the state …

Rapid rouble devaluation and high interest rates are expected to erode business and consumer confidence, which coupled with lower risk appetite, funding and capital constraints of the banking sector should lead to a substantial slowdown in lending …

Since early December Russia’s government 10 year bond yield has risen to 14% on the back of CBR rate hike, fears of capital controls and expectations of rating downgrade. Having incorporated current risk free rate we raise our cost of equity to 19-21.2% for the coverage universe. If we were to use the risk free rate of 12%, we estimate 16-19% upside to our target prices.”

Citi has target price for Bank of St. Petersburg (BSPB.Russia) of 44 rubles, down from 53 rubles.

While it was widely expected that the Greek radical-left Syriza Party would win Sunday’s elections, equity investors are selling on the news today.

Greek banks are in steep decline: Piraeus Bank (BPIRY), which also has exposure to riskier loans in the Balkans, has plummeted 18% this morning, while National Bank of Greece (NBG) is down 10% in U.S. trading. Alpha Bank (ALBKY) is down 3.3%. The Global X FTSE Greece 20 ETF (GREK) is down 4.4% and the iShares MSCI Emerging Markets Eastern Europe ETF (ESR) is down 3%, while a broader measure of emerging markets, the Vanguard FTSE Emerging Markets ETF (VWO) is up slightly.

Getty Images

Syriza supporters hold Greek and French flags.

Syriza did not secure the majority needed to control parliament, with 149 seats; it formed an immediate union with a populist right-wing party, Independent Greeks (ANEL), which has 13 seats. You read that right: left meets right, united. With 162 of 300 seats, the new coalition represents “the worst-case scenario” government for a variety of reasons, writes Wolfango Piccoli at Teneo Intelligence:

“a) there will be no moderating force in the new coalition as both parties hold hardline views on the troika (the International Monetary Fund, European Commission and European Central Bank);
b) the Syriza-ANEL partnership will be uneasy, as both parties diverge on pretty much everything but their disdain for austerity and the MoU [the European Commission Memorandum of Understanding on Specific Economic Policy Conditionality ... [they] differ on a variety of significant policy issues, including taxation, immigration and the role of church in society … [and] ideological divide that separates them is also significant … the outspoken, anti-austerity academic Yanis Varoufakis is set to become the new finance minister, while the more moderate Giannis Dragasakis is expected to lead the team that will negotiate with the official creditors …;
c) ANEL leader Panos Kamennos is an unpredictable political animal, which means that he will be willing to pull the plug whenever is suitable to him.

The decision to include the right-wing party in the ruling coalition sends a negative message to the troika, as it signals that the new government is ready to play hardball in the upcoming negotiations with official creditors. However, unless SYRIZA softens its line and is helped by face-saving concessions by its European partners in terms of a new deal entailing debt relief, a revised medium-term fiscal plan and an economic reform program, Greece risks running out of money by the end of March.”

Jefferies chief global equity strategist, Sean Darby, does not see a Greek exit from the Eurozone as inevitable. Here’s Darby along with Kenneth Chan, quantitative strategist, and Vivien Hu, equity associate, from a notes sent after the polls closed late Sunday:

“Greece is a peculiar equity market to analyze. The economy sits within a common developed economy monetary union, the euro, but is included within emerging market indices due to eligibility issues on securities borrowing, transfer and short selling. Ironically, the Greek economy was expected to grow in real terms 0.6% in 2014 and 2.9% this year according to the IMF — one of the fastest in the euro-zone. Its banking system appeared to have fully recuperated last year and left the accident and emergency ward but the political uncertainty ahead of the elections has seen the banks seek emergency liquidity from the ECB.

The risks of a ‘Grexit’ are probably overstated. There is little popular support to leave the euro-zone completely. Moreover, there are no legal programs to force Greece to leave.”

See this reporter’s recent column, “Greek Victor: Debt Relief” (subscription required), in which I suggested Greece is likely to get debt relief.

The MSCI Latin America index fell 9.3% in December, underperforming the MSCI Emerging Market index (-4.8%), and the MSCI World index (-1.7%), UBS reports. All major countries in LatAm fell, but Brazil was the biggest laggard (-11.4%), followed by Argentina (-9.8%) and Colombia (-7.8%). For the full fiscal year, Colombia was the weakest (-22.3%), while Argentina was the strongest (+17.3%).

UBS prefers Latin America banks to those in Asia, where it is neutral, and to those in emerging Europe/the Middle East/Africa, where it is underweight. UBS is overweight banks in Peru and Mexico, and neutral on banks in Brazil (though it has a number of Buy ratings). UBS analysts write:

“Our overweight stance on LatAm banks reflects the sector’s positive earnings momentum, rising return on equity and attractive valuations. We forecast earnings-per-share growth of 17.5% in 2015 and 13.7% in 2016, well above emerging market peers at 9.9% and 11.5%, respectively. We are also positive on LatAm non-bank financials, given a decent growth outlook, resilient earnings and favourable valuations …

… We reiterate our favourable view on non-bank financials in Brazil (insurance, card), given their resilient earnings and good growth profile. We are more cautious on exchanges, where we see limited upside for trading volumes in 2015. The key themes in 2015 will be (1) revenues diversification, (2) competition and (3) regulation.“

UBS has a buy rating in Brazil, on banks Itau Unibanco (ITUB) and Banco Bradesco (BBDO), payment processor Cielo (CIOXY) and insurer BB Seguridade (BBSEY). It also likes financials in Mexico: Grupo Financiero Banorte (GBOOF), Grupo Financiero Santander Mexico (BSMX), Grupo Financiero Inbursa (GPFOY) and Gentera (CMPRF). Note that some of these names trade over the counter in the United States.

Among the biggest movers today: U.S.-traded shares of Mexico’s Inbursa are up 4.6% in afternoon trading, while Brazil’s Banco Bradesco and Itau are each up more than 3%.

We received a report today detailing a “how-much-worse-can-it-get” case for Russia’s Sberbank.

Sberbank (SBRCY) stock fell nearly 70% in 2014, and tumbled 25% just in December. That puts today’s 3.8% rally to $4.02 in perspective. The Market Vectors Russia ETF (RSX) is up 0.7% today while the iShares MSCI Emerging Markets ETF (EEM) is down 1.4%.

The bank, once the third-largest in Europe, has been stifled by sanctions, the weak ruble and the impact of lower oil prices, and now has a market capitalization of $20 billion.

European Pressphoto Agency

Ruble exchange rates in Dec. 19.

The Central Bank of Russia owns a controlling 52.3% stake in Sberbank. But Ronnie Moas, an analyst and founder of Standpoint Research, thinks the stock can reach $7, and he’s a fan of several other Russia stocks too.

He likes Sberbank’s dominance in Central and Eastern Europe, and its growth potential, despite Russia’s economic troubles. Sberbank was voted the most valuable Russian brand; the brand was valued at $14.2 billion in a ranking by Brand Finance, Moas writes, adding:

“I do not think Russia is “going out of business” or going to zero as the stock market would have had you thinking in the first two weeks of December – and I certainly don’t believe the Google market cap ($360 billion) should be higher than that of the entire Russian stock market. … I think a few years from now people will be saying they wish they had bought Russia (RSX) …

He points out that the bank has a 21% market share in Russia, with 17,893 branches across the Russian Federation, and operations in Turkey, Ukraine, Belarus, Kazakhstan, Austria, Switzerland, India, Germany, China, the US, the UK, and Cyprus. And it has expansion plans in China, Germany and the Czech Republic. The question is, can the bank meet its pre-crisis goal of doubling profits by 2018 through branch closures, layoffs and other measures, in a slowing Russian economy.

Management — the bank and CEO German Greg, who has served in President Vladimir Putin‘s cabinet as a minister of economic development — is “competent,” Moas says. He points to anecdotal evidence that some banks are seeing inflows of retail deposits in rubles and FX, and says that fresh rules on the revaluation of securities in trading portfolios means “massive relief for capital adequacy and regulatory ratios, as banks do not need to mark these securities to market.”

Moas seems to think the bank can turn around some already negative trends. He notes:

“In the first nine months of 2014, net profit was reached RUB 241.3 billion versus RUB 268.3 billion in 2013, down 10.1% year over year. The decrease in net profit was mainly attributed to the significant increase in net provision charges (for loan impairment).”

Moas points to the plentiful macro risks:

“On 19 December, Russia’s lower house of parliament passed a draft law that would give the banking sector a capital boost of up to RUB 1 trillion (US$16.5 billion). … However, the draft law did not clarify which banks could benefit; it just said troubled banks would be selected on the basis of their importance to the economy … S&P said that it has put the country on negative credit watch, and there is at least a 50% chance that Russia’s sovereign rating will be downgraded to “junk” within the next 90 days. Moody’s Investors Service and Fitch Ratings rank Russia one step higher than S&P … the cost to insure Russia’s debt against non-payment for five years more than doubled to 4.21 percentage points this year. This compares with 4.00 percentage points for Lebanon, which is rated “B-” by S&P, or six levels below Russia … foreign-currency external debt stood at $502 billion at the end of Q2, FY14 — nearly a quarter of Russia’s GDP — and about $130 billion of its foreign debt reportedly matures in 2015. … Plummeting oil prices [mean] Russia’s economy is melting … The central bank hiked its benchmark interest rate by 650 basis points to 17%, effective December 16 …”

U.S.-traded shares of Indian companies are moving higher today following a good day for the Mumbai-based stock market.

Agence France-Presse/Getty Images

Prime Minister Narendra Modi of India.

The S&P BSE Sensex Index rose 153.95 points, or 0.57% Monday, to 27395.73 Monday. The index is up five of the last seven trading days. It is down 4.5% for the month and up 29.4% for the year, according to Dow Jones Newswires. In recent U.S. trading today, shares of Tata Motors (TTM) were the big mover, up 2.6%. Wipro (WIT) stock is up 0.3%, Infosys (INFY) is up 0.4%, ICICI Bank (IBN) is up 0.5% and Dr. Reddy’s Laboratories (RDY) is up 0.9%. The Wisdom Tree India Earnings Fund (EPI) is up 1% today.

India’s state-owned banks have doubled in value since February, but look reasonably valued, Deutsche Bank says in a report out this morning.

Deutsche’s Stuart Kirk, Rineesh Bansal and Gaël Gunubu write:

At $200 billion, India’s banking sector is worth less than China’s largest bank ICBC. The country’s 27 public-sector lenders make up half of this capitalisation despite a 70 per cent market share. As India’s fiscally constrained government dilutes its ownership to 52 per cent, investors must decide if such comparisons reflect potential upside or inherent weakness?

Bulls think rising credit demand from infrastructure projects, corporate capex and mortgages could double annualised loan growth to 20 per cent, while lower inflation incentivises financial savings and leads to deposit growth. Bears point to the public sector banks’ market share dropping one percentage point a year, weaker financials, inevitable future capital raises and lack of governance reforms. The verdict so far? Despite doubling since February state-owned banks trade at 1 to 1.5 times book value, less than half their private sector counterparts.

India’s Sensex Index is down nearly 0.9% in recent trading. In U.S. trading, ICICIBank (IBN) fell 2% premarket, and is down 3.6% this week. But the stock is up 59% year to date. The iShares MSCI India Small Cap ETF (SMIN) is down 5% this week and up 50% this year. The Wisdom Tree India Earnings Fund (EPI) is down 4.6% this week and up 27.5% this year.

Greek equities are weak for a second day on worries about near-term political turmoil, and are contributing to fears of broader market declines in the next few weeks.

The Global X FTSE Greece 20 ETF (GREK) was up 0.7% in recent trading, though on the Athens Exchange shares were lower including those of Piraeus Bank (TPEIR.Greece). In U.S. trading, shares of Greek financial Alpha Bank (ALBKY) are down 4.5% and shares of the National Bank of Greece (NBG) are down 1%.

Barclays writes in its daily global report writes:

“Although [Greek] politics remain challenging, we view the chance to … obtain the last EUR 1.8 billion tranche, as well as a [European Union] member states commitment for a subsequent credit line, as a modest positive. With the first-round elections on 17 December, [there are] risks of [leftist party] Syriza coming to power in a new coalition government. European Central Bank speakers yesterday included Praet who said falling oil prices could push euro area inflation below zero while Hansson voiced skepticism over government bond purchases, preferring corporate bonds instead.

Recent nervousness in equity market sentiment is consistent with a potential correction into year end. In our view, equity fund beta is near peak levels, which points to a near-term pullback. With underperformance by active managers, we worry that redemptions will continue and force an unwind of currently extended positioning …”

The rapid deterioration in the Greek market is likely a sign of a bottom for bank stocks.

So says Nikhil Bhatnagar, an Asian equities analyst at Auerbach Grayson. Today, he updated four trades recommended this year, and one important one he has revised is Long Vietnamese banks/Short Greek banks. Bhatnagar is still bullish on Vietnam banks Vietcombank (VCB.Vietnam) and Military Commercial Joint Stock Bank (MBB.Vietnam). And he is now more bullish on Greek banks Piraeus Bank (TPEIR.Greece) and Alpha Bank (ALBKY); each produced a double digit decline since his call. Piraeus shares fell more than 16% in Athens Tuesday, while Alpha is down 10% today in U.S. trading. Bhatnagar writes:

“There remains every reason to be bullish longer term on Vietnam banks, but it might be time to cover shorts on Greek banks given the rapid deterioration in the news flow which is usually a sign of an impending bottom. Fundamentally the argument remains the same, where two countries are at similar stages of the writedown cycle, I would prefer to own banks in the country where nominal income growth comfortably exceeds nominal interest rates as a measure of long-term debt service capability.”

Greek stocks sold off Tuesday on the prospect of election turmoil and the possible rise of leftists just as the Greek economy starts to improve, and the coalition government negotiates an exit from European bailout financing. See our recent post, “Greece: Bond Opportunity or Euro Default Risk?”

Ways to play it: the Market Vectors Vietnam ETF (VNM), down 2.8% today, and the Global X FTSE Greece 20 ETF (GREK), down 12% today. The largest component in the Greek ETF, the National Bank of Greece (NBG), was down more than 13% in recent trading.

About Emerging Markets Daily

Emerging markets have been synonymous with growth, but the outlook for individual nations is constantly changing. Countries from Brazil and Russia to Turkey face challenges including infrastructure bottlenecks, credit issues and political shifts. Barrons.com’s Emerging Markets Daily blog analyzes news, data and research out of emerging markets beyond Asia to help readers navigate the investment landscape.

Barron’s veteran Dimitra DeFotis has been blogging about emerging market investing since traveling to India and Turkey. Based in New York, she previously wrote for Barron’s about U.S. equity investing, including cover stories and roundtables on energy themes. Dimitra was among the first digital journalists at the Chicago Tribune and started her career as a police reporter at the Daily Herald in the Chicago suburbs. Dimitra holds degrees from the University of Illinois and Columbia University, where she was a Knight-Bagehot Fellow in the business and journalism schools. She studies multiple languages and photography.